HARTSELL MANUFACTURING mass-produces a special connector unit that it normally s
ID: 2466186 • Letter: H
Question
HARTSELL MANUFACTURING mass-produces a special connector unit that it normally sells for $3.90. It sells approximately 35,000 of these units each year. The variable costs for each unit are $2.30. A company in Canada that has been unable to produce enough of a similar connector to meet customer demand would like to buy 15,000 of these units at $2.60 per unit. The production of these units is near full capacity at HARTSELL MANUFACTURING, so to accept the offer from the Canadian company would require temporarily adding another shift to its production line. To do this would increase variable manufacturing costs by $0.30 per unit. However, variable selling costs would be reduced by $0.20 a unit.
An irrigation company has asked for a special order of 2,000 of the connectors. To meet this special order, HARTSELL MANUFACTURING would not need an additional shift, and the irrigation company is willing to pay $3.10 per unit.
Given the information above:
(a) What are the consequences of HARTSELL MANUFACTURING agreeing to provide the 15,000 units to the Canadian company? Would this be a wise “special order” to accept?
(b) Should HARTSELL MANUFACTURING accept the special order from the irrigation company?
Explanation / Answer
a. Consequences of Hartsell Manufacturing accepting Canadian order:
Assuming that fixed costs would not change, acceptance of the Canadian order will generate additional profit of
$ 3,000 for Hartsell Manufacturing.
b. If the special order from the irrigation company is accepted, the profit would increase by 2,000 x $ ( 3.10 - 2.30) = $ 1,600. Hence the order should be accepted.
$ Sales revenue ( 15,000 x $ 2.60) 39,000 Variable costs ( 15,000 x $ 2.40) 36,000 Contribution margin from special order 3,000Related Questions
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